Thursday, June 27, 2013

The rise of Facebook and Twitter led many people in 2006-2008 to start or fund multiple social product companies. Many of the entrepreneurs and investors who went all in on social have since shied away from this market.

However, a survey of the big winners suggests the pace at which large social networks emerge has not slowed down. Although it is hard to reproduce a success the size of Facebook, many billion dollar social companies have been started more recently. Below is a chart of major products versus the year they launched [1,2].

Once you remove products that never reached traffic on the scale of the top ~50 or so sites based on Alexa[3] you end up with:

Just as the calls came that "social is dead", a wave of major services launched. WhatsApp, Foursquare, Pinterest, Instagram, and Snapchat launched 2009 or later. A number of vertical social networks also launched including NextDoor (2011), ClassDojo (2012), and EdModo (2008).

2009-2011 Mobile Social Emerged
While it is unclear if all the newer companies listed above will be successful, it is striking that so many new social networks have hit scale since 2009. Obviously, the internet is a much bigger place than it was 10 years ago so scale can come faster.

The rise of mobile as a new platform has yielded a whole new set of social products (5 of the 6 companies listed since 2009 are mobile-first products). The ubiquity of smart phones has also opened up more time of the day for people to spend time online in short bursts - the perfect behavior for a social product or game. Finally, many young users don't want to use the same social networks their parents inevitably join once it gets large enough.

It is interesting to speculate if Google Glass or other new platforms will yield new social products tailored to new hardware experiences.

2008-2012 Specialized Social Experiences
Just as LinkedIn (launch 2002) pioneered business social products a new slew of vertical networks have emerged including NextDoor (launch 2011), ClassDojo (2012), and EdModo (launch 2008). In general, the vertical networks take longer to grow, but in many cases monetize more directly for a subset of users then broad based consumer sites (see e.g. LinkedIn).

Death Of Social Products
Over time, a number of social products that have hit scale have died (e.g. Friendster, Digg, and Myspace). Typically social products can only die due to self-inflictedwounds once they have traction. I would not be surprised if 1-2 of the companies I listed since 2009 will also eventually be subsumed.

Why Have Early Stage Investors and Entrepreneurs Fled Social?Scar Tissue. Many investors wrote a large number of checks to early stage consumer products only to watch most or all of them fail. It is hard to spot a good social product before it has traction, when it is still cheap to invest. Withdrawing from the market is a rational response to not being able to call whether a product will work or not.

On the entrepreneurial side, most entrepreneurs who tried to build social products have largely failed as well. It is hard to predict what service will resonate with consumer until you launch it. Many of these entrepreneurs are now working in other markets.

Allure of the new. The same investors who scorned hardware 18 months ago are now suddenly talking about how much they love drones. Silicon Valley works in waves of trends, some of which are legitimate and some less so (e.g. the "nanotech" wave of the early-mid 2000s). The big trends today include hardware, bitcoin, health, and education. Some of these trends will prove out to be healthy places to spend time. In other cases the new trends will be dead ends.

Thinking it is game over. Many people believe Facebook and Twitter have won the social wars and no additional major companies will emerge. A common refrain is there isn't any room for consumers to spend more time on social. Given how rapidly behavior changes (especially among younger users), the growth of "mobile time", and the seemingly infinite capacity for people to poke each other online, I am skeptical of this argument. Older users typically follow younger users onto social products, and younger users have a lot more room for experimentation.

I would not be surprised if this pace of innovation continues for the next few years, with a new major social property launching every year or so.

Thanks to David King for many of the conversations that sparked this post[4].

Notes
[1] I have purposefully avoided listing companies that have a "social" component (e.g. Yelp, Waze, etc.) but are not primarily some form of content posting or status message service.
[2] I did not list launch dates for e.g. Chinese (Sina Weibo, RenRen, Tencent Weibo and WeChat) and Korean (Line) social products as I am less familiar with them.
[3] I kept Snapchat and WhatsApp in the list as I believe they are converging on traffic on the scale of an Alexa50 site, but it is hard to measure mobile messaging traffic.
[4] AFAIK I am probably ripping off a number of his ideas.

Thursday, June 20, 2013

VCs are short on time and attention span as they meet large numbers of companies every week. Like raccoons, they often are distracted by the latest shiny object in the form of a new company or product. If you pitch them for a Series A and they pass, it is very hard to go back to raise money from them a few months later (even if you have significantly more traction). Every time you pitch a VC and they pass, the bar for them to invest in your company later goes up.

As an entrepreneur, this makes it really important for you not to "poison the well". You need to choose the right timing to raise a Series A relative to your traction. You also need to be thoughtful about if, and how, to meet with VCs in advance of a fundraise. Meeting VCs a few weeks before an official fundraise to "stir up interest" may backfire without a pre-existing relationship (more below).

Things To Do Before Trying To Raise Series A

Check your runway.

How much money are you burning? How much time do you have left? You typically want to raise money if you have 6 months or less of runway left. If possible avoid raising money during the month of August or December as most VCs are away on vacation.

If you have enough money to not die anytime soon, you can check your traction to see if you should raise money now or what for a key event to happen (see below).

If you are running out of cash, and do not have the traction to raise a Series A, you will need to either (a) cut down expenses and potentially your team to extend runway (b) make more money or (c) raise a bridge or (d) sell while you still have time to exit.

A big decision point if you decide to fundraise without traction is whether to skip a Series A fundraise and go directly for a bridge round, or whether to try to raise a Series A first (or in parallel).

Check Your Traction

Do you realistically have enough traction to raise a Series A? One way to assess this is to ask a few fellow entrepreneurs, angel investors, or advisors what they think.

Some questions to ask regarding your traction:

-Growth rate. Are you growing at least 10%[1] or more a month consistently? (optimally 20-30% or more). Is this growth organic?

-Engagement. How engaged are users? How often do they use your product?

-Overall userbase. How large is your userbase or customer base?

-Customers. If you are a SaaS or enterprise company, what is your customer mix? How valuable is each customer? What channels are you using to reach customers and how scalable & profitable are these channels?

-Revenue. Are you making money or not? How valuable is each incremental user? What is your business model and how much do you need to prove it out? Does revenue growth rate track user/customer growth?

Assume that X traction is enough to raise a Series A. If you pitch a VC with <X traction they will pass. If you then come back 3 months later with X traction, they will pass again. Unfortunately, every time you pitch the same VC the bar for them funding you goes up.

Plan Around Key Events

If you have runway to last another 9 months, but don't have the traction to raise a round, think through what near term milestones may enable you to raise money. Do you have a new product release coming that will boost distribution? A new revenue deal with a major partner? An app store feature? If nothing in the next few months will make any real difference to your momentum, are you really working on the right things?

Unlike angels who invest early, VCs are looking for clear signs of traction that will de-risk their investment and create a high return over time.

Pitch Prepared
When you do meet with VCs to raise a Series A, have a clear and cohesive story. Optimally, practice your pitch with existing investors or advisors. Treat this as a sales call, not a casual conversation. If you don't impress a VC in your first conversation, you are unlikely to have another anytime soon.

Remember, a Series A fundraise is radically different from an angel round. While you can get away with some sloppiness with angels[2], you need to be well prepared with VCs.

Market Timing

Sometimes a market gets hot and VCs will act irrationally. If you are in a market that every VC wants to invest in, you can sometimes raise a Series A earlier then merited based on little traction. There is a bit of an art to exploiting this but usually if you are in a hot market you will start to get inbound pings or the VCs may literally show up at your office un-invited (really!).

Proactive Rounds

Similarly, in some rare cases a single VC you know well will get excited about you are doing and ask if you want to "come in and meet the partnership". In some cases this will lead to proactive funding at a valuation much higher then you would normally deserve given your traction. In other cases this will lead to the partnership passing on you. After they pass, it will be hard to get them interested again.

Unless you have traction, be cautious about turning the conversation with one proactive VC into a fundraising conversation with multiple. You may end up getting burned by all of them and not be able to go back a few months later when you are in better shape. Conversely, if the proactive VC really wants to fund you, you will need to create competition in the round quickly by enlisting other VCs to bid on your company. This is a delicate balance to pull off.

Things To *Not* Do

Don't pre-met a bunch of VCs for coffee 2 months before your official raise. If the VCs think you are pitching them over coffee, or if they just met you recently, they may not want to connect again 2 months later when you are really raising. Wait until you have a well baked, cohesive story before meeting anyone. Then treat it as a real fundraise.

Don't be fooled by VC "interest".

A VCs job is in part to network and meet new companies and entrepreneurs on an ongoing basis. Multiple VCs may ask to meet for coffee after you are in a TechCrunch article. This may be more a sign of them sniffing around to build a long term relationship then immediate interest.

Notes
[1] 10% a month is kind of borderline depending on all the other factors mentioned (userbase size, revenue, etc.).
[2] "Angels" is a really broad term these days and can apply to anything from a random rich person who write a big check on the spot on through to a professional investor with a $100 million fund. In many cases, early stage investors may assess an investment very differently from a top tier VC assessing a Series A. This allows you to get away with more during a seed round fundraise.